Jun 27 BMC Part Nineteen: Making It Great

Here are five principles that you can use to strengthen your idea, identify and patch up weaknesses, and stumble upon the small tweaks that ramp up growth.

Great models have the right pricing structure

Pricing is so important for a new idea.

Too high and you scare off customers.

Too low and you miss out on valuable cashflow.

A clever pricing structure can entice your customers to give you a shot, and then incentivise them to make a second, third or tenth purchase.

There is no universally perfect price point, it’s more a matter of finding what is most appropriate for your industry and your customers.

Three angles to explore are Cost Based, Market Based and Value Based pricing.

Cost Based pricing is where you calculate how much you spend making a product or delivering a service, then add a margin and that’s the price, like what a supermarket does.

Market Based pricing is where you set the figure based on what your competitors/substitutes are charging. This is typically seen with bars, banks and petrol stations.

Value Based pricing is where you determine what your product/service is worth to a customer, and set your prices accordingly. This is often seen in the luxury goods industry – a designer bag costs nowhere near $6,000 to produce, but there is certainly demand for ultra-premium priced bags.

Of course, you’ll want to consider all three before locking in your prices.

Too low and you’ll lose money per transaction.

Too high and you’ll lose customers to your rivals.

Great models have been validated through testing

A good model has validated all three of our lenses:

It’s proven to be desirable – our customers love it, and are keen to come back again

It’s proven to be feasible – we’ve made our product/delivered our service without burning ourselves out

It’s proven to be viable – we make a surplus from each transaction

This is not a thought experiment, we’ve actually gone and made sales and trialled the business at small scale. Tests give honest feedback, whether we like what we found or not…

Even a failed test is useful, better to lose a small amount to learn a big lesson than to overinvest in a flawed idea.

Great models have growth plans

Everyone has a plan to grow that sounds like “we plan to scale up in the next three months”.

The trouble is, very few people can articulate how they’re going to do it.

Mumbling something about social media and word of mouth doesn’t count.

You need an action plan: What are we going to test, which channels are we going to focus on, what enticements we’re going to use to drive acquisition rates, what incentives we’ll offer to boost retention rates, etc.

These sound scary, but they’re quite straightforward.

We naturally assume growth comes from big marketing budgets and media stunts, but those aren’t reliable or measureable enough.

Growth comes from trialling a series of small experiments, carefully measuring which ones seem to work, then repeating the cycle again and again.

Great models gather feedback

There are two types of feedback that need to be gathered.

The first type is verbal – what we hear from customers, partners, investors and our own support network. This can be useful, although is sometimes watered down in order to make us feel better.

The second type is non-verbal - customers vote with their wallet, and with their feet. Sure, if we deliver something that’s a 3/10 we’ll hear about it, but what about the 7/10’s? They tend to quietly walk away, not complaining but not returning either.

Our job as entrepreneurs and business modellers is to learn from customer’s behaviour, not just their words.

In the words of David Ogilvy:

“Customers don’t know what they feel, don’t say what they know, and don’t do what they say. Market research is three steps removed from real behaviour”

Great models proactively make themselves obsolete

Business Models have an expiration date.

Given that, who would you like to stumble upon the model that makes your business obsolete?

Your competitors? Or yourselves?

So much of innovation comes from finding ways to improve your current ideas. If you stop looking, your business stagnates, and suddenly you’ll be overrun by your rivals.

Millions and millions of happy customers, then complacency took hold, and their deaths were quick yet painful.

For examples of companies who do reinvention well, look at Amazon or Nespresso – who keep changing their business and the way they’re perceived, or companies like Google or Virgin who are constantly exploring new industries where they can become popular.

Of course, what these five principles have in common is that they take time and diligence, and their results aren’t immediately visible.

That’s what strategy is about – trading off making a quick buck in order to make something that will be thriving for years to come.

The Business Model Canvas isn’t magic, and it won’t automatically make your idea a success. But by drawing out the hidden opportunities (and threats) that surround your business, it can give you the best possible chance of building something remarkable.

In our final part of the series, we’ll be looking at what you should look at next, and what books will help you in the next few months…